Paradigm has raised concerns over the European Securities and Markets Authority’s (ESMA) proposed regulations under the Markets in Crypto Assets Regulation (MiCA), particularly regarding the misinterpretation of Maximum Extractable Value (MEV). ESMA recently stated that MEV will be considered a form of market abuse under the upcoming MiCA framework. However, Paradigm argues that ESMA’s current approach misinterprets the mechanics and implications of MEV, which is a crucial feature in the operation of DeFi ecosystems.
MEV refers to the potential value that miners and validators can extract from reordering transactions within a block. Paradigm asserts that MEV plays an important role in supporting the DeFi ecosystem by enabling the efficient allocation of blockspace and assisting in essential market activities. The firm emphasized that ESMA’s characterization of MEV as a form of market abuse, similar to front-running in traditional financial markets, demonstrates a fundamental misunderstanding of blockchain technology.
Paradigm also expressed concerns about ESMA’s intention to apply Market Abuse Regulations (MAR) to the “base layer” of crypto assets, involving decentralized infrastructure operators. The firm believes that MAR, originally designed for traditional financial markets, is not suitable for decentralized infrastructure in the blockchain space. Paradigm cautioned that applying MAR to blockchain operations could hinder innovation and potentially lead key technology firms to relocate outside the EU.
Paradigm recommended that MAR’s applicability should be limited to situations involving centralized services and platforms operated by Crypto Asset Service Providers (CASPs) with direct customer relationships. The firm suggested that CASPs operating centralized exchanges should ensure fair market practices and transparency. Additionally, Paradigm urged ESMA to conduct further research and engage with the private sector to gain a better understanding of the nuanced role of MEV in blockchain ecosystems.
The response from Paradigm highlights the challenges of regulating emerging technologies with frameworks initially designed for traditional markets. As ESMA continues its consultation process, the crypto industry remains vigilant of potential regulatory developments that could significantly impact the future of blockchain and digital assets in Europe.
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